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Why Now Is the Time to Exit This Shipping Stock

May 29, 2014 | About:
jaggom

jaggom

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DryShips (DRYS), a leading player in the shipping industry, performed excellently in 2013 with the stock gaining almost 140%. But, investors are advised now to book their gains and consider selling DryShips. The company reported its third-quarter results in November and the report had some worrying signs.

It was a mixed quarter for DryShips as it managed to beat estimates on revenue but missed out on earnings. Revenue increased from last year and comprehensively beat the consensus estimate. But the bottom line for DryShips is not healthy at all. For the bottom line, the performance of DryShips was disappointing as the loss increased.

The bottom line is bound to deteriorate as DryShips is facing a heavier debt burden now. The debt-to-capitalization ratio of the company jumped from 0.52 to 0.58 in the previous quarter. This means that DryShips will have to pay more interest going forward on account of increased debt. Further, DryShips suffered a year-over-year increment of 6.3% in expenses. Therefore, rising expenses and a worsening debt situation could degrade DryShips’ cash reserves in the future.

Rising Debt Is a Big Worry

DryShips performed quite satisfactorily this year due to the investor optimism that has been built upon the belief that the company is well positioned to capitalize on the recent revival in shipping rates. But, this does not seem to materialize as DryShips might not be able to capitalize on this revival in shipping rates as it might not generate enough cash to pay off its huge debt.

According to Yahoo! Finance, the total debt in the most recent quarter for DryShips was a whopping $5.30 billion. This is certainly huge considering that DryShips had just $506 million in cash at the end of the last quarter. This huge debt might further strain the operating margins in the future and could even force the company into liquidation as the debt looks dangerously high.

For shipping segment, DryShips reported $13.4 million in EBITDA, but it spent more than $33 million in debt payments. So, it is obvious that DryShips is unable to generate enough cash to service its debt payments and it will have to triple its earnings to provide for the debt repayments adequately. Hence, it cannot be considered that the recent revival in shipping rates will turn around the company's fortunes so drastically.

Poor Management and Share Dilution

DryShips' management had decided to issue around 6 million shares for $20 million as it aims to tap every possible method to generate cash. This isn’t the first time that DryShips put its shares on dilution to get more cash. This share dilution methodology doesn’t make DryShips an ideal buy for a long-term investor as it might never come back to a good return due to poor management.

Ideally, DryShips management must consider selling off its underperforming assets to keep its financial condition intact rather than dilute shareholder equity. However, the company is doing just the opposite. It paid a buyer $21.4 million earlier this year to get rid of two unfinished tankers.

Ocean Rig Is No Savior

DryShips' financial situation is believed to get better due to drilling operations it provides through its partially owned subsidiary, Ocean Rig. Although DryShips commands a 59% stake in Ocean Rig, still it has no control over the capital and resources of the company. So, investors are misunderstood to believe that Ocean Rig's order backlog of $5.8 billion will benefit DryShips greatly.

Conclusion

Despite a huge debt burden, poor cash position and poor management decisions, DryShips has gained strongly this year. But under these circumstances, no one can expect the stock to sustain its bullish run for long. Investors who have earned quite a lot this year by investing in DryShips are advised to book their gains and look for safer and more stable investment options.


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